A brand manager launches an aggressive
price promotion with the goal of boosting profits and
sales. Could his
plan increase demand for the entire product category as
well?

It may, but not for long, concludes Kellogg
School Assistant Professor of Marketing Vincent Nijs
in an award-winning
paper published in Marketing Science.

Researchers have long been interested
in the impact of price promotions on brand choice and
brand sales, but
have paid far less attention to the effects of price
promotions
on entire categories of goods, even though both manufacturers
and retailers stand to benefit from category expansion.

Nijs and his co-researchers examined the
short- and long-term effects of price promotions on 560
product
categories.
They found that price promotions can indeed boost
category demand, but that the effects tend to last no
more than
about 10 weeks.

“
You’d think that greater intensity of competition
would lead to more category expansion,” Nijs says. “But
we didn’t find that to be the case. In fact, there
isn’t that much competitive reactivity at all.”

What’s a more effective way to bring
about a long-term increase in category demand? Successfully
introduce a new
product, Nijs says.

The paper, which was based on Nijs’s doctoral dissertation,
received the prestigious John D.C. Little Best Paper award
in 2002. The award is bestowed annually on the most impressive
study appearing in Marketing Science or its companion journal
Management Science. It also received the Frank Bass award
for the best dissertation-based article published in Marketing
Science.
Nijs was the lead author of the study, which
was co-written with Marnik G. Dekimpe of the
Catholic
University of
Leuven, Jan-Benedict E.M. Steenkamp of Tilburg
University, and
Dominique M. Hanssens of the University of California,
Los Angeles.

The researchers identified factors that
impact the effectiveness of price promotions. They observed:

Price promotions are more effective when they are offered
frequently, but only over the short run.
This is likely due to a decline in baseline sales
as the consumer learns
to buy “deal-to-deal.”

Price
promotions are less effective at increasing
category demand in categories experiencing
an
influx of new products.

Price
promotions are most effective in perishable-good
product categories.

Competitors
often don’t react to price promotions,
either with price promotions of their
own or increased advertising.

A follow-up study to be published in an
upcoming issue of Marketing Science further explores
the ways competitors
tend to respond to price promotions and
advertising. This study confirms Nijs’s previous
findings that the dominant response to competitive attacks
is, in fact, no
response at all.

When competitors do respond, it’s often with an instrument
that has no significant effect on their own sales. Of those
brands that opt to retaliate, 37 percent promote ineffectively,
while 76 percent advertise ineffectively.

“
Competitors sometimes fail to react when they should, and
react aggressively when they shouldn’t.” Nijs
observes. “You would expect competitors to respond
to the extent that their sales are hurt by the marketing
actions of others. However, companies sometimes see a competitor
do something and think they have to react, but very often
there’s no reason for them to do anything. If it’s
not hurting them, they’re spending lots of money
and there’s no point. Such responses can lead to
price wars and all sorts of other unprofitable actions.”

Nijs hopes that his findings translate
into practical insights for business leaders, helping
managers respond better to
rivals’ advertising and promotions.

If managers had “perfect information,” says
Nijs, they could figure out the best strategic response.
But because there can be “a lot of noise” in
the marketplace, companies often cannot distill the true
effects of their competitors’ actions.

“
The data is available to them, but they have to let loose
the relevant models on it,” says Nijs.

About Professor Nijs
Prof. Nijs is a marketing expert whose research includes
study of the dynamic effects of marketing efforts, category
expansion, cross-category demand dependencies, cross-sales
effects, and competitive response.

He teaches marketing research at the Kellogg School and
serves as a reviewer for the International Journal of Research
in Marketing.